UPDATE 3-Morningstar buying rater of structured finance

Fri Mar 19, 2010 3:47pm EDT

* Morningstar in $52 million deal for Realpoint LLC

* Morningstar: subscription model avoids conflicts

* S&P: transparent ratings address conflict worries (Adds Fitch response, pay arrangements)

By Ross Kerber and Aaron Pressman

BOSTON, March 19 (Reuters) - Morningstar Inc (MORN.O) plans to buy credit rating firm Realpoint LLC to expand its challenge to the three major rating agencies in structured finance, one of the most lucrative parts of the business.

Chicago-based Morningstar said on Friday it will pay $52 million for Realpoint, a spinoff from GMAC Commercial Mortgage Securities Inc [GMACC.UL]. Realpoint, based in Horsham, Pennsylvania, focuses on structured credit products such as commercial mortgage backed securities.

Morningstar is best known for its research on mutual funds but has been expanding into other areas lately, including a move in December to start publishing credit ratings on debt of about 150 of the largest U.S. companies.

The structured ratings business is dominated by Standard & Poor's, a unit of McGraw-Hill Cos Inc MHP.N, Moody's Corp (MCO.N) and Fitch Ratings, a subsidiary of French financial services firm Fimalac SA (LBCP.PA).

But critics, including the attorneys general of Ohio and Connecticut, say the big three helped cause the financial crisis by giving excessively high ratings to weak structured securities that later went into default. The critics charge that the large agencies fell prey to a conflict of interest since debt issuers paid for ratings and could withhold future business.

Morningstar and Realpoint say they will avoid that conflict of interest because most of their ratings are paid for by investors instead of issuers. About 225 institutions currently subscribe to Realpoint's research.

"We are more aligned with investors," said Realpoint Chief Executive Robert Dobilas, who is one of five co-founders of the company.

The companies also maintain they will do a better job tracking changes in credit quality. "The other ratings agencies were spending research time on the new issues and weren't following up on the existing ones," said Catherine Odelbo, Morningstar's president of equity research.

Realpoint does charge fees to companies to rate new structured issuances. But clients can review its models to avoid conflicts in those cases, executives said.

A spokesman for Standard & Poor's said that all business models have potential conflicts and that his company addresses them by making its ratings widely available. "Unlike the subscriber model, our ratings are released to the market free of charge to all market participants," said spokesman Ed Sweeney.

Fitch spokesman David Weinfurter made a similar point. "There are conflicts that have to be managed by credit rating agencies whether they are paid by issuers, investors, or both," he said.

A representatives of Moody's did not respond to questions.

Odelbo will oversee Realpoint and its 43 employees.

Like S&P, Moody's and Fitch, Realpoint is registered with the U.S. Securities and Exchange Commission as a "Nationally Recognized Statistical Ratings Organization." The designation allows many types of investors including mutual funds and pension funds to rely on its ratings as part of meeting their regulatory obligations.

Morningstar said it will pay $42 million in cash and $10 million in restricted stock for Realpoint, which had revenue of about $12 million in 2009.

(Reporting by Ross Kerber and Aaron Pressman; Editing by Derek Caney, Tim Dobbyn and Richard Chang)

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